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Home Prices Start to Show Signs of a Turnaround

The United States is still suffering the worst housing market downturn since the Great Depression, but a slew of factors suggest the worst may soon be over.

Among the strongest signs that the the hard-hit sector could be recovering, home prices in many regions of the country are now falling at a slower rate, after two years of declines, and in some areas prices have actually risen.

AP

The battered housing market is critical to the U.S. economy, with impact from the construction industry to the sale of appliances and furniture.

After hurting growth in recent quarters, an improvement in the housing market could portend a turnaround for the world's largest economy, which many say is either on the brink of a recession or already in one.

"Anybody who tells you they know when the housing market will bottom is delusional, but anybody who denies there are some positives out there that could make the housing market bottom fairly soon is equally delusional," said Karl Case, the co-developer of a widely watched gauge of the housing industry and an economics professor at Wellesley College in Massachusetts.

The Standard and Poor's S&P/Case-Shiller Home Price Indices, which Case co-developed, has shown a slowdown in the fall-off in home prices in recent months. Other data also show signs of a bottom in house prices.

New housing starts fell to 975,000 in April from a peak of 2.27 million in January 2006. In the past 35 years, in the three other times that starts fell from more than 2 million to under 1 million, housing market activity rebounded within a quarter, Case said.

How to Fix the Housing Mess? Watch Video at Left.

Residential construction as a percentage of real gross domestic product, however, is below the historical bottom, Case noted.

Case, whose research has focused on real estate markets and prices for over 20 years, said certain regions of the country now look similar to when they bottomed in past down cycles.

A bottom in the battered U.S. housing market may emerge first in California, one of the states hardest hit by foreclosures and where home prices are dropping to a point where the cost of a mortgage and taxes equals rent.

"The key is to try is to get some stability in the price of homes, which appears to be happening in California," said veteran banking analyst Charles Peabody, of Portales Partners in New York.

And as goes California, the most populous state, so goes the rest of the United States, according to Peabody.

"California is the linchpin and so if the region flattens, that changes everything," Case said.

Among the signs of a turn in the housing market, on a year-over-year basis, the S&P/Case-Shiller 20-City Composite Index was down 15.8 percent in May, but on a month-over-month basis home prices only fell 0.9 percent, the smallest monthly drop since September 2007.

And while on a year-over-year basis all 20 metro areas surveyed reported a decline in home prices, on a month-over-month basis home prices actually increased in eight metro areas in April and in seven metro areas in May.

In March, only two metro areas showed prices rising month-over-month.

In a separate index published on Tuesday by Integrated Asset Services, the IAS360 House Price Index, home prices rose 1.1 percent on a national level in June from May.

In addition, U.S. home sales contracts signed in June unexpectedly rose across the country to their highest level since October.

The National Association of Realtors said last week its Pending Home Sales Index, which is based on contracts signed in June, was up 5.3 percent to 89.0 from a downwardly revised 84.5 in May.

"The data came in much better than we were expecting and much better than the market was expecting," said Michelle Meyer, an economist at Lehman Brothers in New York.

"I think a lot of the increase has to do with foreclosure sales, which are selling at a quicker pace and have a faster turnaround time." Meyer said foreclosure sales, which have dragged overall home prices down, should help shave off what is widely considered one of the top problems facing the market: an unwieldy supply of homes for sale.

"Housing market data is certainly showing early signs of stabilization on the activity side and home price side," said Torsten Slok, senior economist at Deutsche Bank in New York.

"We are not at the end of tunnel yet, but more indicators are starting to look as if we are at least getting closer to it." Housing legislation signed into law last month offers a tax credit to first-time home buyers and aims to ward off some foreclosures.

It also shores up Fannie Mae and Freddie Mac, which own or guarantee nearly half of the entire, $12 trillion U.S. mortgage market.

"When you are fighting a war, you need as many soldiers as possible," Case said.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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